Diploma in Charity Accounting: Charity - sample script 2 1. POLICY, LAW AND REGULATION 1a. i) Describe one development in policy, law or regulation; ii) Explain the impact of this development on your organisation; and iii) Explain the action you took to implement the development or comply with it. Early adoption of SORP 2005 in Report and Accounts: March 2005 SORP 2005 was published in mid-march 2005 and the Charity has an accounting period which ends on 31 March each year. Whilst early adoption was discretionary and the requirement was that the SORP applied only to accounting periods starting after 1 April 2005, I decided that the Charity as a leader in the sector should go for early adoption. The timetable for preparation of the annual accounts concludes with Trustee agreement in early July, so there was an opportunity to consider the requirements of the new SORP and then implement it. To do this, I had to create the new format and reconcile back to the previous year's accounts to demonstrate to our auditors how and why the comparatives had changed. In redrafting the accounts, I addressed and solved four major issues: The new SORP included a suggested format with the option of tailoring to the individual charity's requirements. Without practical examples from previous years, the SOFA had to be built from first principles, understanding what was required in the SORP and interpreting the words in the SORP. The SOFA format in the new SORP included trading activities in a separate line. I had traditionally shown those results in tabular format on the SOFA. The new SOFA required a significant review of presentation of the trading results. The new SORP took support costs off the face of the SOFA and showed them as allocated to charitable activities in the notes to the accounts. In the presentation, I balanced giving a degree of accuracy in the allocation without disclosing to the world the cost of our Finance or HR department. I completely redrafted the Trustees' Report using the headings laid out in the SORP. I found the words in the SORP helpful and felt confident that the new-style report reflected the aims laid out by the SORP Committee of the Charity Commission. The accounts were approved by Trustees in the new format in July 2005 and published in October. In December 2005 the Charity Commission accepted the Charity's accounts as a good example of implementing SORP 2005. (Word count 350, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 1 of 7
2a. 2. RESOURCE MANAGEMENT i) Describe one issue of resource management at your organisation; ii) iii) Explain how you addressed the issue; and Explain how this enabled you to make improvements to the organisation. Outsourcing the Charity's IT into a shared services company (PQ) With the Finance Director from another charity (CD), I established a joint venture company (PQ) into which we would outsource both charities' IT. In doing so, our intention was threefold: To increase the efficiency of IT in both charities. To reduce costs by greater economies of scale yet not incurring the extra VAT costs arising from commercial outsourcing. To improve the technical skills by employing specialists that otherwise would have to be imported. The discussion on establishing PQ started around the use of field staff. The Charity had 180 teams and projects scattered around England, Wales and Northern Ireland, and to service the IT needs of these offices we were using around 16 field staff. By looking at their timesheets I realised that around 50% of their time was spent travelling between one team and another. In discussions with the Finance Director of CD, I realised that he had the same issue with the vision of our field staff passing each other on the road! We both saw that by putting the two operations together we would increase the density of teams to be serviced and hence the efficiency. I set up a two-day workshop at which the two IT departments discussed the commonalities of operation. Coming out of that meeting was the scope of PQ, covering: PC support and maintenance including generic user software (Microsoft Office); network support and maintenance; and training. I took legal advice using as solicitors a firm with experience of joint ventures in the construction industry. They also had an IT outsourcing partner. PQ as a company was registered in October 2004 and I was given permission by the Charity Commission to use the word 'charity' in the name because of the remit of the company to service only charities. The company started trading in November 2004 with 3,500 PCs at an average cost of 1,050 per PC. In March 2007 a third charity joined PQ and by September 2007 the number of PCs had risen to 5,000 at an average cost of 850 per PC a saving of 200 per PC, demonstrating a better use of resources. The company grew to 50 employees including specialists in network management and telecoms both unaffordable luxuries to the Charity prior to PQ. (Word count 381, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 2 of 7
3a) 3. MARKETING, FUNDRAISING, INCOME GENERATION AND INCOME DISTRIBUTION FOR PUBLIC BENEFIT i) Describe one marketing, fundraising, income generation or income distribution campaign/strategy at your organisation; ii) Explain how you contributed to it; and iii) Explain how this benefited the organisation. The introduction of direct debit donations As part of a new initiative, the Charity agreed to increase investment in attracting regular givers. The proposition accepted by Trustees was that instead of a request for 15 cash to help a child, we would ask for a direct debit contribution of 2 per month. The Trustees accepted the principles of the change but in the early stages were nervous because the payback period was longer and the proposition was untested. After an initial pilot which proved successful, in February 2004 the Fundraising team came up with a proposal to increase investment with an immediate 2 million being made available for us to use in conjunction with our Direct Mail agency. First indications from Trustees were not positive from two aspects: their nervousness that the proposition had not been sufficiently tested to justify the risk of a significant investment; and the impact on the year-end accounts if the full amount was charged to costs. Working with the Director of Fundraising, I approached the Direct Mail agency to consider a position of sharing risk. The agency was very supportive of the programme and saw the Charity as a leading player in developing this type of fundraising. The agency also saw all the results so knew the history and the trends. It was prepared therefore to advance to me the sum of 2 million on the basis that its costs would be repaid from the proceeds. I entered into an agreement whereby the agency incurred the cost and the Charity paid it half the proceeds from that element of the campaign arising from its investment. There was a small risk premium payable for success but equally a clear understanding that the proceeds would not be repaid in the event of failure. I achieved my objectives as: the proposal became risk-free from the Trustees' perspective; the year-end figures were unaffected because the unrecovered element of the 2 million was included in the accounts as a creditor rather than a cost. The auditors were satisfied that on the basis of the agreement negotiated, the risk in the transaction lay with the agency. This style of fundraising has proved very successful and by the end of 2007 the Charity had over 1 million donors on the database giving a total of 70 million per year. I feel that as Finance Director I played a key part in resourcing the activity in the early phases of development. (Word count 406, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 3 of 7
4. STRATEGY AND GOVERNANCE 4a. i) Describe one issue of strategy or governance at your organisation; ii) Explain how you addressed the issue; and iii) Explain how this benefited the organisation. Matching the Investment Strategy of the Charity to the Reserves Policy The reserves policy of the Charity is: to retain sufficient free reserves equivalent to approximately 6 months' forward expenditure. I produced a paper to consider what events could occur that would require us to use reserves. The Trustees decided that the most likely such event was a significant downturn in voluntary income. The Charity raises 85% of its funding through voluntary donations, the large majority of which is uncertain from one year to the next. Whilst the introduction of monthly giving through direct donors has made the continuation of donations more certain, the Charity is still at risk of a sudden decline in income. I took advice through reading the reserves policies of other charities and CC15 from the Charity Commission. I modelled several scenarios in the Charity for a significant decline in income up to a maximum of 50%, each of them pointing to one major issue the decision-making process to decide the future. I highlighted (with a degree of sensitivity) that the biggest time-consumer would be the decision-making of both management and Trustees. Just because income halved, there was no reason to assume that all activity would also halve and that the structure of the Charity would have to be significantly remodelled. I estimated that the recognition of the problem would take 1 month; the decision-making on what to do, 2-3 months; and the implementation, at least 3 months. Giving overlapping actions, my estimate of lapsed time from risk crystallising to a new 'model' of the Charity was 6 months. During this period, the reserves would have to cover the difference between income raised and ongoing costs. My paper confirmed that the current reserves policy of 6 months' forward expenditure was sufficient to cover the costs of creating the new smaller model of the Charity. However, this did have implications for the investment strategy. The investments had been held in a balanced fund with the Investment Managers working to 80% equity and 20% bonds and cash. The Reserves exercise showed that if we were really keeping the reserves for a sudden downturn, they needed to be more liquid. The investment strategy became 50% with a maturity of less than 12 months (of which around half had to be immediately available) and 50% with a maturity of greater than 12 months. I worked with the Investment Managers over a 5-year period to liquidate equities at the rate of 1% per month taking advice from them over which assets to liquidate. The funds moved into liquid assets, mostly term cash deposits. By the end of September 2007, 72.9% was held in cash or shortterm bonds. (Word count 436, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 4 of 7
5. CHARITY ACCOUNTING, AUDITING AND TAXATION 5a. i) Describe one significant charity accounting/audit/taxation issue at your organisation; ii) Explain how you addressed it; and iii) Explain the technical knowledge/skills that you used in doing so. Accounting for the acquisition of Charity LM (March 2006) The Trustees of the Charity and the Trustees of Charity LM agreed in November 2005 that the two charities should join together with effect from 1 February 2006. Both charities had a year end of 31 March and I agreed that we should account for two separate charities for the fiscal year 2005/06 and merge the accounting into one charity from 1 April 2006 with a consolidated Report and Accounts at 31 March 2006. Looking at FRS6, and taking advice from our auditors, I decided that the accounting for the merger should be as an acquisition. Unfortunately our auditors had no experience of a charity that under FRS6 had chosen acquisition rather than merger accounting. I therefore had to work from first principles using FRS6, the merger agreement with Charity LM and the agreement for the transfer of assets and liabilities. Acquisition accounting under FRS6 requires that assets and liabilities be brought into the books at fair value. I realised that fair value for many of the assets was less than book value and I was facing the issue of accounting for the write-down, making the transfer and understanding what was left in the Charity LM balance sheet at 31 March 2006. The key issues were: Some of the local authorities declined to assign the contracts for grant aid so I had to leave the transactions relating to these contracts in the books of Charity LM. There were significant write-downs in property values, including 1.2 million on the freehold London headquarters building, an extra 600k on dilapidations and 200k of leasehold improvements no longer of value. I had to transfer assets at value but leave the write-down in Charity LM. I received confirmation from the Pension Providers that when Charity LM staff were transferred to the Charity under TUPE (necessary under the merger agreement), it would be considered as an exit from the scheme and exit penalties of 1.1 million would be due. These were shown as a current liability in the consolidated balance sheet. The impact of these adjustments was that there was a small overall surplus on assets transferred but I realised that this covered both restricted and unrestricted obligations. I valued the restricted obligations at greater than the asset value transferred so the outcome of implementing FRS6 was that I consolidated a negative net asset transfer on unrestricted funds. (Word count 395, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 5 of 7
6a. 6. FINANCIAL MANAGEMENT i) Describe one issue of financial management at your organisation; ii) Explain how you addressed the issue; and iii) Explain how this enabled you to add value to the organisation. Creating and developing the Charity's Balanced Scorecard I was a key player in the development of the Charity's balanced scorecard, which reports corporate performance in the four key areas of Serving the Customer, Running the Business, Learning and Growth and Managing Resources. The Charity's balanced scorecard contains around 40 indicators and I was responsible for the section on Managing Resources: selecting the 9 Key Performance Indicators, collecting the data and gaining ownership from my fellow Directors on the accuracy and validity of the performance reported. The structure of the Charity's balanced scorecard has three pages. The top sheet shows the results against each of the 40 indicators for each quarter of the last 2 years. Behind the top sheet there are 2 other pages, the first of which defines how each indicator is calculated and the second shows the ranges between which the performance is considered to be acceptable (green), needing monitoring (amber) or needing action (red). To meet the requirements for Managing Resources, I researched what indicators could be used. CFDG facilitate an annual financial benchmarking exercise in which the Charity participates. There is a similar fundraising benchmarking exercise and the public sector collects organisational performance data from the Best Value reviews in local government. To link this external data into the Charity, I met with the Directors to discuss the indicators. All felt that the fiscal results were important and that the management accounts were a sound basis. On that advice I took 3 financial indicators on income directly from the management accounts, added reserves held and the value for cash held against budget. I considered that these 5 indicators gave a valid abbreviated summary of fiscal performance. I chose 4 other indicators based on the importance to the Charity of the resources concerned. The Charity is reliant on fundraising for 85% of its income, so I added 2 indicators for fundraising, (i) cost : income ratio and (ii) donor attrition, both benchmarked against the charity standards. Staffing costs account for 60% of costs, with the number of staff shown in the management accounts. I chose the efficiency measure of the number of days' sickness benchmarked against the public sector. Finally, IT is an increasing important resource to the Charity and I chose the measure of cost per PC used by our shared services company PQ. I believe the balanced scorecard has connected the Trustees to the operation of the business. I have used the resources section to tie the balanced scorecard into the management accounts. The Trustees have confidence in the management accounts and this confidence has flowed into the rest of the balanced scorecard. The Trustees are now in a stronger position to support statements on output and outcomes, both statements being supported and evidenced by the balanced scorecard. (Word count 456, excluding question requirements and titles) DChA Charity sample script - 2.docx Page 6 of 7
7. CONCLUSION Drawing together your responses to questions 1-6, set out three key learning points from your experience, highlighting skills acquired or developed and lessons learnt. Key learning points In my review I have included only my experience as Finance Director of the Charity. In May 2008 I joined a new employer and I have taken many of the learning points into my new role. The three I would highlight that I have found to be most transportable are: 1. The differing ways in which SORP 2005 can be interpreted. The accounts for the Charity were written as a story of achievement leading the reader through the numbers. The accounts of the charity I now work for, whilst compliant with SORP, are more number-focused and I believe less comprehensible to non-financial readers. 2. The link between the reserves and the investment policies. In my new charity there is a separate investment policy to a great extent driven by the investment advisers to get the best return for the charity. As I discovered in my old charity, the investment policy should be checked against the reserves policy to ensure it is able to be met if the reason for holding reserves crystallises. 3. Linking the financial performance shown in the management accounts with the activity of the charity. There isn t the same confidence amongst the Trustees of my new charity that they are aware of and understand the activities of the charity. They are less able to appreciate how to achieve the outcomes they seek for the services of the charity. Much of the experience outlined in this section has been encouraged and informed by cross-sector groups such as CFDG. Through involvement in such groups, discussions with fellow professionals and involvement with the SORP Committee I hope my learning and growth will continue. (Word count 273, excluding question requirements and titles) Total word count 2,697, excluding question requirements and titles DChA Charity sample script - 2.docx Page 7 of 7